From the point of view of private-sector employers, it’s been a disastrous year for benefit costs.
For the year ended March 2003, benefit expenses leaped 6.1 percent, greater than the 4.8 percent jump for the year ending March 2002, according to figures just released by the U.S. Bureau of Labor Statistics. State and local government employers had similar boosts: 6.6 percent in benefits and 3.1 percent in wages and salaries.
Fueled by a rapid ramp-up in benefit costs, the Employment Cost Index (ECI) for total compensation spiked 1.3 percent from December 2002 to March 2003, according to the bureau. That followed a 0.7 percent gain in the ECI in the previous quarter. The index measures quarterly changes in compensation costs.
Indeed, employer payouts for pensions and medical plans are practically lapping other payroll costs. In the private sector, benefit costs jumped 2.4 percent—outpacing a 1 percent wage-and-salary gain for workers—in the quarter ending in March. The benefit bump-up was substantially higher than all quarterly gains since March 2000, according to the bureau.
Much of the rise in benefit costs stemmed from surging health-insurance premiums and a recent upturn in retirement costs, especially those involving defined-benefit pension plans. As measured by the government, employee benefits include health (and other) insurance, retirement plans, paid leave, and legally required benefits such as Social Security.
All told, employer costs for those benefits now account for nearly 30 percent of compensation costs, according to the bureau’s statistics.
The rise in labor costs varied by industry. The finance, insurance, and real-estate category registered the biggest rise in compensation costs with a nearly 5 percent gain for the quarter ending in March. Labor-cost hikes in manufacturing (1.8 percent) and wholesale trade (1.7 percent) were also sizable.
Compensation increases were weighed down a bit by payouts in retail trade (a drop of 0.1 percent), transportation and public utilities (a 0.7 percent boost), and construction (a 0.8 percent increase).
Senior corporate executives who made hay on the sales of hot initial public offering shares given to them in return for investment banking business might soon have to disgorge their profits. This according to a story in the Wall Street Journal.
As part of the $1.4 billion settlement between government investigators and 10 of the biggest securities firms, regulators charged Credit Suisse First Boston and Salomon Smith Barney with “spinning” IPO shares.
With Monday’s agreement, the investment firms reportedly won’t be allowed to dole out special IPO access to public-company officers or directors in exchange for investment banking business.
Following the settlement with the securities firms, New York attorney general Eliot Spitzer (one of the officials involved in the deal) reportedly warned that executives who garnered IPO profits that should have gone to their employers might be forced to give back their gains to their companies.
Last September Spitzer sued five telecommunications executives for repayment of IPO profits. The executives were Bernard Ebbers, former WorldCom CEO; Philip Anschutz, former chairman of Qwest Communications; Joseph Nacchio, former CEO of Qwest; Stephen Garofalo, chairman of Metromedia Fiber Network; and Clark McLeod, former CEO of McLeod USA.
Anschutz is expected to pay $4.4 million to charity to settle the suit, according to a report in USA Today.
Salomon Smith Barney obtained the underwriting business of these executives’ companies, according to Spitzer. The bankers also allegedly offered the executives shares in lucrative IPO shares. When the share prices climbed sharply, the stocks were often sold, allegedly netting the executives millions.
Spitzer’s case cites New York laws that don’t require evidence of a quid pro quo between Salomon and the executives. Instead, the attorney general claims he only must prove that the executives failed to disclose material facts that could have affected an investment’s value.
The executives’ IPO profits and the nature of their investment banking relationship with Salomon were never disclosed to investors or shareholders, according to the attorney general.
Moreover, the relationship between Salomon and the telecom executives “rested on a presumption that [Salomon] would deliver favorable stock ratings for the executives’ companies as an inducement and reward for obtaining the investment banking business,” according to the suit.
Canning Janitor Shams
Schemes involving so-called janitors life insurance may be going down the tubes.
Employers’ use of the insurance suffered a blow when a federal appeals court ruled that American Electric Power (AEP) had taken part in a sham by buying the coverage, the Wall Street Journal reported.
The sole reason the company bought policies on 20,000 of its workers in 1990 was to produce tax deductions, the court found. Janitors insurance is a form of highly leveraged, broad-based corporate-owned life insurance (COLI). It’s generally referred to as janitors insurance because it covers all of a company’s employees.
The broad-based policies have just about eclipsed key-person life insurance, which enables companies to collect substantial benefits when an important employee dies. In the late 1980s, insurers began to promote COLI plans for wider pools of workers, allowing companies to finance the policies with loans from the insurer.
Insurers promoted the janitors plans as a tax-advantaged way to finance the rapidly rising costs of employee health-care benefits. By borrowing against the policies and deducting the interest on the loans, employers reportedly were able to produce cash flow without tying up a whole lot of capital.
In the AEP case, the Internal Revenue Service reportedly disallowed $66 million worth of deductions the company claimed as a result of interest it paid on the loans it took out to pay for the janitors insurance. AEP paid the $25 million in taxes the IRS claimed it owed, contesting the government’s decision in federal district court. After losing that case, the power company appealed.
Besides AEP, other employers have been ordered to cough up the results of big previous COLI deductions to the IRS. Earlier this month, however, a U.S. district judge ruled that Dow Chemical could reportedly hold on to $22 million in tax benefits it claimed under similar arrangements it set up in the late 1980s and early 1990s.
The IRS has investigated at least 85 companies claiming $6 billion in COLI deductions, according to Reuters.
Words from the Insurance Oracle
When it comes to forecasting the direction of property-casualty premiums, AIG chairman Maurice Greenberg is about as close as it gets to an insurance-industry spokesman.
That’s why commercial insurance buyers can bank on paying more for their coverage. While property insurance rates are moderating a tad, companies will continue to see boosts in their liability insurance costs, Greenberg reportedly predicted.
“We’re getting the pricing we think we need,” Greenberg said at UBS Warburg’s Global Financial Services Conference. “We think we will continue to get it.”
Translation: higher premiums. Of course, part of insurers’ need to collect higher premiums stems from the precarious state of some of their reinsurers. In fact, AIG now demands that reinsurers post collateral as part of any reinsurance contract, according to a report by Dow Jones newswires.
The list of trusted reinsurers that AIG cedes risks to has shortened. “We manage reinsurance like any other credit risk,” Greenberg reportedly said.
Another threat to insurance-industry solvency is the recent spate of jury awards in asbestos lawsuits. Greenberg said the insurance industry is negotiating the possible formation of a trust fund for asbestos lawsuits.
Those negotiations, however, are in a fairly tenuous state. Labor leaders, manufacturers, and insurers are “somewhat apart” on the size of the fund, he said. It’s also hard to say reinsurers will take part in the fund, noted Greenberg.